Refund or CENVAT credit on input services allowed only if services are consumed in output service

Recently in the case of Kbace Tech Pvt. Ltd. Vs CCE/ CST CESTAT ruled that the refund or CENVAT credit on input services is allowed only if the services are consumed in the output service.  It is held that the Board’s Circular No. 120/01/2010-ST, dated 19-1-10 does not have the effect of amending the statute and cannot be seen as authorising sanction of refund if the credit of service tax does not relate to services consumed for providing the output service.

The Order has initiated the new battle between the tax administration authorities and judicial organs over legislative intentions behind the grant of refund of Cenvat credit on input services to the service exporter. The Latest decision has the department a reason to block the service tax refunds.

To relax the controversies revolving around the eligibility of refund claim to the service exporters, the Central Board of Excise and Customs came out with a Circular on January 19 this year, clarifying the position in favour of the various service exporters. Further, in order to support the Board’s view, the Union Budget 2010 brought retrospective amendments vide Notification No. 5/2006 (‘the Notification’) to rules governing the procedural aspects of claiming refund of unutilised Cenvat credit. However, soon after the issue of much-awaited clarifications and proposed amendments in the Notification, Bangalore CESTAT in the case of KBace Tech has shaken the very foundation of the Cenvat credit scheme that governs the eligibility of the input services for Cenvat credit.

Introduction of the levy of service tax in 1994 was the first initiative towards the unified value added tax (covering goods as well as services). The service tax being a consumption tax, input tax credit mechanism was introduced to avoid the cascading effect. Cenvat credit has been evolving and has undergone many changes over time.

In brief, earlier, Rule 5 of the Cenvat Rules allowed the refund of Cenvat credit availed on the inputs or input services only to manufacturer exporters.

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